CAN A BORROWER ESCAPE REPAYMENT OF AN OUTSTANDING LOAN IF THE BANK BREACHES THE LOAN AGREEMENT OR FACILITY AGREEMENT?
INTRODUCTION
Can a borrower escape repayment of an outstanding loan if the bank breaches the loan agreement or facility agreement? This issue was previously addressed by the Supreme Court in Bank Bumiputra Malaysia Bhd Kuala Terengganu v Mae Perkayuan Sdn Bhd & Ors [1993] 2 MLJ 76 (“Mae Perkayuan“), where Abdul Hamid Omar LP concluded that a bank’s claim for loan recovery is distinct from the borrower’s right to claim damages and does not exempt the borrower from the obligation to repay the loan.
This question was revisited by the Federal Court in Bank Kerjasama Rakyat Malaysia Berhad v GM Healthcare Sdn Bhd (GMH) & 5 Ors [Federal Court Civil Appeal No. 02(f)- 62-10/2023 (W)]. In this article, we will examine the current legal stance on this matter, focusing on the Federal Court’s review of the High Court and Court of Appeal’s decisions that suggested a borrower’s and guarantor’s liability could be absolved if the bank breached the terms of the facility.
BACKGROUND FACTS
The appeal before the Federal Court arose from a dispute involving Bank Kerjasama Rakyat Malaysia Berhad (“Bank“), Sunshine Fleet Sdn Bhd (“SF“), and GM Healthcare Sdn Bhd (“GMH“). Jabatan Kerja Raya (“JKR“) had awarded the Shah Alam Hospital construction project (“Project“) to SF, which then subcontracted additional and remedial work to GMH.
On 22 May 2009, GMH entered into a financing facility agreement (“FFA“) with the Bank for RM64,130,000.00. Concurrently, guarantees were provided by the fourth, fifth, and sixth respondents, along with a corporate guarantee from the third respondent. The Bank secured additional security through a third-party assignment of contract proceeds from SF to GMH, which SF was to deposit into a project account with the Bank. The Bank would then deduct an agreed amount for loan repayment before releasing any surplus to GMH’s account or SF’s account.
Disputes arised over the entitlement to surplus amounts from interim certificates no. 24 onwards. The Bank continued to disburse funds directly to GMH’s subcontractors for interim certificates 24 to 28 and withheld surplus amounts pending resolution of the dispute. SF filed a lawsuit and sought a Mareva Injunction to restrain GMH and the Bank from handling surplus amounts.
On 11 June 2010, SF notified the Bank of the Mareva Injunction application, prompting the Bank to withhold payments, including those to third-party subcontractors and vendors of GMH. SF claimed project delays were caused by GMH and sought to terminate the subcontract, leading JKR to terminate SF’s contract for poor performance.
SF alleged the Bank failed to deposit surplus amounts from interim certificates 24 to 32 into its account, instead paying GMH. The Bank counterclaimed for recovery of amounts owed under the financing facilities, citing JKR’s termination of the Project as an event of default, which obligated GMH and its guarantors to repay RM24,004,368.53. Further, GMH counterclaimed against SF and the Bank, contending on the Bank’s breached against the FFA by failing to release interim payments no. 29 and 30 to its third-party subcontractors.
The High Court found that the Bank had breached the FFA by failing to release funds despite the Mareva Injunction. This breach was deemed to absolve GMH and the guarantors from repaying the debt, nullifying the Bank’s counterclaim. The High Court’s reasoning followed Jasa Keramat Sdn Bhd v Monatech (M) Sdn Bhd [2001] 4 CLJ 549, which suggested that good faith actions conducted in the ordinary course of business do not necessarily amount to contempt.
The Court of Appeal upheld the High Court’s decision, dismissing the Bank’s and SF’s appeals.
SALIENT FINDINGS OF THE FEDERAL COURT
The Federal Court overturned the High Court and Court of Appeal decisions, emphasizing that the Bank’s breach of the FFA does not exonerate the borrower and guarantors from their obligation to repay the loan.
The Federal Court reaffirmed the principle established in Mae Perkayuan, which maintains that a bank’s loan recovery claim is separate from any claims for damages the borrower might pursue. The Court concluded that GMH’s claim for damages due to the Bank’s breach must be pursued separately and does not negate their obligation to repay the outstanding loan.
The Federal Court also made a finding against the lower courts’ potential implication that a bank’s breach could result in the borrower being absolved of repayment, which could disrupt the financial industry by allowing borrowers to evade repayment based on alleged breaches. Ultimately, the Court found that there was no breach of the FFA. Even if a breach had occurred, it would not relieve GMH or the guarantors of their repayment obligations. The Court concluded that the disputed amounts withhold by the Bank were part of the Mareva Injunction dispute, justifying the Bank’s withholding of funds. Different circumstances would apply if SF had consented to the disbursement or if the certificates were not part of the dispute.
COMMENTS
This Federal Court decision is pivotal for the banking industry, affirming that borrowers remain obligated to repay their loans regardless of any breaches by the bank. A contrary ruling could have set a troubling precedent, potentially enabling borrowers to evade repayment based on minor breaches by financial institutions.
For personalised legal and compliance support, please reach out to our Dispute Resolution Senior Associate, Mr. Azrul Haziq Khirullah (azrul@nzchambers.com) or Advisory & Compliance Associate, Ms. Nurul Husna Shariff (husna@nzchambers.com). We are here to help you achieve compliance and manage these regulatory updates effectively.
Authors:
- Azrul Haziq
- Husna Shariff